PM - Monday, 20 October , 2008 18:14:00

Reporter: Stephen Long

But that's not the perspective of anyone out there in the real economy who has to pay more for goods, services or business materials.

The latest official figures on producer prices show the sharpest increase in input costs on record. That's squeezing the profit margins at a time when business is also facing higher funding costs and that in turn may feed into an increase in unemployment.

Economics correspondent Stephen Long.

STEPHEN LONG: Sympathy for business seems to be about as fashionable as sympathy for the devil. Everyone from the Prime Minister of Australia to the Archbishop of Canterbury is condemning corporate excess and greed.

So spare a thought for Australian producers. They're facing a double whammy: a record rise in the cost of raw materials and other inputs at a time when the cost of credit is sky high.

For ten years the statistician here has been recording various measures of producer prices. In the past three months every stage of production recorded the highest three month increase since the series began.

BILL EVANS: Broadly speaking, I think it is indicative that price pressures are still alive and well in Australia.

STEPHEN LONG: Bill Evans is the chief economist at Westpac.

BILL EVANS: The issue will be whether these cost increases can actually be passed on to the consumer because clearly I would imagine that with consumer confidence weak consumers are going to be a lot more resistant to price increases from companies that are facing these increase in their costs.

STEPHEN LONG: And the evidence does suggest that not all the price rises are being passed on to consumers. Higher costs are being absorbed and profits are being squeezed.

ROB HENDERSON: Well yes there is definitely a profit squeeze going on and that's been the case now, oh for a good couple of years because we've seen it showing up in our NAB business survey where the input prices that businesses are facing have been growing more rapidly than their output prices.

STEPHEN LONG: Rob Henderson from NAB Capital.

The profit squeeze could be bad news for workers as well as bosses because higher production costs coincide with higher funding costs and lower demand and that could spell more job losses.

Bill Evans was already among the economists expecting a sharp rise in unemployment. But he says, let's put it into perspective.

BILL EVANS: Well we expect the unemployment rate to be rising. We've obviously seen the low point. Our forecasts are that we'll see the unemployment rate up around six per cent in early 2010. That's a two percentage point jump in the unemployment rate. That's a much bigger jump than we saw in the previous two downturns in 01 and 1996 but nothing like the spectacular six percentage point jump that we saw back in 1989-90.

STEPHEN LONG: But we're still talking about an extra 200,000 people or so out of work?

BILL EVANS: That would be about the arithmetic of that, yes.

STEPHEN LONG: NAB also sees the jobless rate heading above six per cent. But Rob Henderson says tough as that is, some rise in the unemployment rate is in the greater good.

ROB HENDERSON: That would actually be a healthy sign from the point of view that any wages breakout under the current circumstances with inflation so far about the Reserve Bank's target band would have inevitably meant higher interest rates or at least that the Reserve Bank couldn't cut rates as much as they might like to.

So, you know, a rise in the unemployment rate, at the moment it's 4.3 per cent, lower than it's been at any time since 1975. The natural rate of unemployment in our economy for like is probably around four-and-three-quarters to five per cent so some rise in the unemployment rate, I know it's dreadful for people that lose their jobs, but there's still plenty of jobs out there and some rise in the unemployment rate actually is healthy from the economy wide perspective.

STEPHEN LONG: Not that 200,000 people set to lose their jobs and those who will be forced onto shorter hours and lower incomes will necessarily see it that way.

But Rob Henderson is optimistic we won't see a recession in Australia or the double-digit jobless rates of old for one reason - China.

ROB HENDERSON: The encouraging thing to me is that we've seen ongoing growth and investment in China. That's where all the iron and steel is being used. And also the urbanisation means very strong growth of household consumption in China. We've seen no let up in that in September with those figures growing by 23.2 per cent, year on year, same as it was in the previous month.

STEPHEN LONG: So even if Chinese exports slow, he still sees plenty of work for Australia as China's quarry.